Telecom Debt Do Not Pose Systemic Risk To Banks: Fitch

The trouble faced by Indian banks due to telecom companies is not as large to pose a systemic threat, but defaults could affect lenders with weak financials, said Fitch Ratings.

It added that the banking sector is already going through a rough phase due to significant asset quality issues and may require hefty capital inflow from the government over the next few years.

“The credit profiles of Indian telcos are under pressure from fierce competition stemming from the entry into the market of Reliance Jio last year and rising capex required for the roll-out of 4G services. Some companies could find it difficult to service their debt and we have the sector on a negative outlook,” said the report.

Fitch saw that the pressure is most severe at Reliance Communication, which is downgraded last month to ‘CCC’ to show the actual possibility of some kind of default. Other than this, most companies such as Airtel, Vodafone, Idea and even Tata Telecom are in a better position, also as they are backed by a strong parent.

Rcom’s total debt is around $7 billion, a mojor part of which is owed to state-owned banks.

“Moreover, not all telcos face financial difficulties. Market leader, Bharti Airtel, is likely to meet repayments comfortably on the over $1 billion that it owes to banks. Vodafone and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share. Idea’s balance sheet is stretched, but the combined company is unlikely to experience serious problems in servicing its debt,” said Fitch.

The Vodafone and Idea Cellular merger will bring up a stealthier company vindicating the risks posed by Idea’s stretched balance sheet.

“Vodafone and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share. Idea’s balance sheet is stretched, but the combined company is unlikely to experience serious problems in servicing its debt,” said the agency.

“Loans to telcos are also generally backed by spectrum assets, which should provide a better chance of recovery than, for example, a steel factory operating below capacity or a power plant that lacks a power purchase agreement,” It said.

Fitch said that the sale of sprectrum assets may take longer than banks expect and not fetch full value. This is because the major three telcos now have enough spectrum to run their operations for the medium term.

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